The Next Big Worry

The Dow is down about 4.8 percent this week, the worst showing since November.

The jobs report was bad, but not the worst case scenario that some were expecting. Two stocks declined for every one advancing, but volume was again on the light side.

In fact, volume has been light since before Christmas. The good news is that the decline this week was due to a lack of buyers, not any panicky sellers.

The bad news is that there is still little enthusiasm to buy stocks.

Alcoa kicks off fourth quarter earnings on Monday.

The big worry right now is earnings revisions. Downward earnings revisions are continuing, and are particularly strong in retailers, energy and materials. It is also picking up for the first quarter. Why does this matter? Because stock performance is fairly closely correlated with earnings revisions.

Another problem is analyst downgrades: according to Deutsche Bank, this is the worst on record, both in terms of the breadth of the downgrades (the number of stocks that are or have been downgraded) and the depth (the number of stocks that are rated at "reduce" or "sell").

Why does this matter? Because a notable turn in sentiment--stocks being upgraded--is often used as signs of a durable bottom (stocks often put in an absolute bottom before this).

As for 2009 earnings, it goes like this: there is a second half recovery expected. In particular, there is an expectation that earnings in financials and consumer discretionary stocks will stage a recovery.

This, as you might guess, is a pretty tall order given the economy.

Earnings are expected to DROP for materials and energy stocks, and here there might be a bit of an upside if we get some kind of bottom in the global economy.

Bottom line: stocks may or may not have bottomed, but to get a notable rise off the bottom, we will need more positive earnings sentiment than we are currently getting. Absent that, we will have failed rallies and will, at best, be condemned to moving sideways for a good part of the year.